Hydraulic Fracturing & Water Stress: Water Demand by the Numbers

(1)

HYDRAULIC FRACTURING

& WATER STRESS:

Water Demand by the Numbers

Shareholder, Lender & Operator

Guide to Water Sourcing

February 2014

A Ceres Report

Authored by

(2)

ABOUT CERES Ceresisanonprofitorganizationmobilizingbusinessandinvestorleadershiponclimate change,waterscarcityandothersustainabilitychallenges.CeresdirectstheInvestorNetwork onClimateRisk(INCR),anetworkofover100institutionalinvestorswithcollectiveassets totalingmorethan$12trillion.Formoreinformation,visithttp://www.ceres.org orfollowCeres onTwitter@CeresNews. TheopinionsexpressedinthisreportarethoseofCeresanddonotnecessarilyreflecttheviews ofanyreviewersorresearchers.Ceresdoesnotendorseanyoftheorganizationsoroperators thatareusedasexamplesorreferencedinthereport.Wedonotacceptresponsibilityforany inaccuracyormisinterpretationbasedontheinformationprovidedinthisreport. ACKNOWLEDGEMENTS CereswishestothankWorldResourcesInstituteforitsassistanceindevelopingthewater stressmaps,aswellasPacWestConsultingPartnersforitssupportwiththeorganizationand interpretationoftheFracFocusdataandtheirguidancewiththetechnicalaspectsofwater useinshaleenergydevelopment. Wealsowishtothankourcolleagueswhoprovidedvaluableinsightsandassistance: PeytonFleming,BrookeBarton,SharleneLeurig,AndrewLogan,RyanSalmon,BrianSant, MegWilcox,MeganDohertyandSiobhanCollins.WeareparticularlygratefultoDanielBressler andCandaceMcNamarafortheirtirelesseffortsinconductingbackgroundresearchand dataanalysisandtoPeterZheutlinforhiseditingassistance. DroughtandgroundwaterstressmapsdevelopedbyBlueRasterLLC. GraphicdesignbyPatriciaRobinsonDesign. ©Ceres2014

FOR MORE INFORMATION, CONTACT: Monika Freyman, CFA

SeniorManager,WaterProgram Ceres 99ChauncyStreet Boston,MA02111 freyman@ceres.org www.ceres.org To access the interactive maps associated with this report, visit www.ceres.org/shalemaps

(3)

EXPERT REVIEWERS

Thisreportbenefitedgreatlyfromnumeroussuggestionsandfeedback fromoutsidereviewers,including:

•Laura Belanger,WesternResourceAdvocates •James D. Bradbury,JamesD.BradburyPLLC

•Jennifer Coulson,BritishColumbiaInvestmentManagementCorporation •Sarah Forbes,WorldResourcesInstitute

•Francis Gassert,WorldResourcesInstitute •Diana Glassman,TDBankGroup

•David Hampton,IrbarisLLP

•Steven Heim,BostonCommonAssetManagement •Duncan Kenyon,PembinaInstitute

•Leonard Konikow,U.S.GeologicalSurvey

•Richard Liroff,TheInvestorEnvironmentalHealthNetwork •Courtney Lowrance,Citi

•Granville Martin,JPMorganChase

•Jean-Philippe Nicot,TheJacksonSchoolofGeosciencesattheUniversityofTexas •Paul Reig,WorldResourcesInstitute

•Jason Switzer,PembinaInstitute •Olivia White,JPMorganChase

(4)

|

1 FracFocuswelldatawasobtainedviaPacWestConsultingPartners’FracDBdatabaseandallwaterstressdataandmapswerefromWorldResource Institutes’Aqueduct Water Risk Atlas,availableathttp://pacwestcp.com/research/fracdb/ andhttp://www.wri.org/our-work/project/aqueduct,respectively. 2 ElevenstatesdirectorallowoperatorstoreporttoFracFocusincludingTexas,Colorado,Pennsylvania,NorthDakota,SouthDakota,Mississippi, Louisiana,Oklahoma,Ohio,Utah,MontanaandtwoCanadianprovinces,AlbertaandBritishColumbia.ReportingtoFracFocusisstillvoluntaryinother jurisdictions.Thefactthatreportingtothesiteremainsvoluntaryinsomejurisdictionmeansourdatabasemayleadtounder-reportingofwateruse. Source:Konschnik,Kate,MargaretHoldenandAlexaShasteen,“LegalFracturesinChemicalDisclosureLaws,”HarvardLawSchoolEnvironmental LawProgram,April23,2013.

Executive Summary

ThisCeresresearchpaperanalyzesescalatingwaterdemandinhydraulicfracturing operationsacrosstheUnitedStatesandwesternCanada.Itevaluatesoilandgascompany wateruseineightregionswithintenseshaleenergydevelopmentandthemostpronounced waterstresschallenges.Thereportalsoprovidesrecommendationstoinvestors,lendersand shaleenergycompaniesformitigatingtheirexposuretowatersourcingrisks,including improvementofon-the-groundpractices.Theresearchisbasedonwelldataavailableat FracFocus.organdwaterstressindicatormapsdevelopedbytheWorldResourcesInstitute, wherewaterstressdenotesthelevelofcompetitionforwaterinagivenregion.1 TheU.S.portionoftheanalysisisbasedonhydraulicfracturingwater-usedatafrom39,294 oilandshalegaswellshydraulicallyfracturedbetweenJanuary2011throughMay2013,as reportedtothewebsiteFracFocus.org.2_{Theresearchshowsthat97billiongallonsofwaterwere} used,nearlyhalfofitinTexas,followedbyPennsylvania,Oklahoma,Arkansas,Coloradoand NorthDakota.Amongmorethan250operatingcompaniesreportingtoFracFocusintheUnited States,Chesapeake(ticker:CHK)hadthelargestamountofwaterusereported,usingnearly 12billiongallons,followedbyEOGResources(EOG),XTOEnergy(ownedbyExxon,XOM) andAnadarkoPetroleum(APC).Halliburton(HAL),aserviceprovidertomanyshaleenergy operators,handledthelargestvolumeofhydraulicfracturingwateroverall,nearly25billion gallons,overaquarterofthewaterusedforhydraulicfracturingnationally,followedby Schlumberger(SLB)andBakerHughes(BHI). |

Nearly half of the wells hydraulically fractured since 2011 were in regions with high or extremely high water stress, and over 55 percent were in areas experiencing drought.

(6)

|

Nearlyhalfofthewellshydraulicallyfracturedsince2011wereinregionswithhighorextremely highwaterstress(Figure ES1),andover55percentwereinareasexperiencingdrought. InColoradoandCalifornia,97and96percentofthewells,respectively,wereinregionswith highorextremelyhighwaterstress.InNewMexico,UtahandWyoming,themajorityofwells wereinhighorextremelyhighwaterstressregions.InTexas,whichcurrentlyhasthehighest concentrationofhydraulicfracturingactivityintheU.S.,morethanhalfofthewellsexamined (52percent)wereinhighorextremelyhighwaterstressregions.Extremelyhighwaterstress, usingWRI’sdefinition,meansover80percentofavailablesurfaceandgroundwaterisalready allocatedformunicipal,industrialandagriculturaluses.

FIGURE ES1:NORTH AMERICAN WATER STRESS & SHALE ENERGY DEVELOPMENT

25,450 May 2013 map 39,294 US+ 1,341 CA December 2013 map

A database of hydraulically fractured wells is overlaid on a map of baseline water stress in the United States and two Canadian provinces for which we have data. This map measures the ratio of water withdrawal to mean annual available supply, and shows where there is high competition for limited water resources among users. Red areas on the baseline water stress map are places where a large portion of available water supply is already being used. The gray areas are dry and undeveloped. Black dots on the map represent wells hydraulically fractured.

For interactive map, see ceres.org/shalemap. Source: WRI Aqueduct Water Risk Atlas in

combination with well data from PacWest FracDB from FracFocus.org and FracFocus.ca between January 2011-May 2013 for the U.S., December 2011-July 2013 for British Columbia and December 2012 - July 2013 for Alberta.

(7)

|

Shaledevelopmentinmanyregionsishighlyreliantongroundwaterresources,whichare generallylessregulatedthansurfacewaters,thusincreasingrisksofwaterresourcedepletion andwatercompetition.Over36percentofthe39,294hydraulicallyfracturedwellsinour studyoverlayregionsexperiencinggroundwaterdepletion(Figure ES2).

Companyexposuretoshalewaterrisksisbestunderstoodatthecountyormunicipallevels (Figure ES3).Inmanyinstances,welldevelopmentwasconcentratedinjustafewcounties foreachplay,withwateruseforhydraulicfracturingintheseregionsoftenexceedingannual waterusebylocalresidents.InCalifornia,NorthDakota’sBakkenplayandColorado’sDenver-Julesburgbasin,mostofthehydraulicfracturingwellswereconcentratedinthreeorfewer counties.Over30differentcountiesusedatleastonebilliongallonsofwater(roughlyequivalent todailywateruseofeightmillionpeopleinNewYorkCity)forhydraulicfracturingoperations duringthereport’sstudyperiod.DimmitCounty,TexasintheEagleFordplayhadthelargest volumeofwateruseforhydraulicfracturingnationally—aboutfourbilliongallons.Garfield andWeldcountiesinColoradoandKarnesCountyinTexaswerethehighestwateruse countiesinregionswithextremewaterstress—eachusingovertwobilliongallonsofwater forhydraulicfracturingoverthemulti-yearperiod. Thistrendhighlightstheoftentimesintenseandlocalizednatureofshaledevelopment, whichcreateschallengesforsmallercountiesthatoftenlackresourcestomanagewater availabilityconstraints.

FIGURE ES2:GROUNDWATER DEPLETION & SHALE ENERGY DEVELOPMENT

Groundwater Depletion in Cubic Kilometers

A U.S. Geological Survey map of cumulative groundwater depletion, from 1900 - 2008, in 40 major aquifer systems overlaid by 39,294 hydraulically fractured oil and gas wells (black dots). For interactive map, see ceres.org/shalemap.

Source: Well data from PacWest FracDB from FracFocus.org between January 2011-May 2013 and U.S. Geological Survey Scientific Investigations Report 2013-5079.

Over 36 percent of hydraulically fractured wells were found to overlay regions experiencing groundwater depletion

(8)

3 Seventy-twopercentofTexaswasexperiencingabnormallydrytoexceptionaldroughtconditionsasofDecember31,2013, http://droughtmonitor.unl.edu/Home/StateDroughtMonitor.aspx?TX. |

Regional Findings

Thereportincludesseparatecasestudiesineightregions(sixintheUnitedStates, twoinwesternCanada).Amongthekeyregionalfindings:

Texas:

Texasisgroundzeroforwatersourcingrisksduetointenseshaleenergyproductioninrecent yearsandaprojecteddoublingofhydraulicfracturing-relatedwateruseoverthe nextdecade.Allofthiscomesasovertwo-thirdsofTexascontinuestoexperiencedrought conditions,keygroundwateraquifersareunderstressandthestate’spopulationisgrowing.3 Watercompetitionchallengesarealreadyarisingwithseveralshale-producingcounties operatingunderwateremergencies,leavingshaleproducersscramblingtodevelop alternativestofreshwatersources.Tacklingthesechallengesismademoredifficultby theindustry’soverallpoordisclosureonwateruse,especiallygroundwaterusewhichhas especiallyweakdisclosureandpermittingrequirements.

High Water Use & Stress County

Top Two Oil & Gas Companies By Water Use

Annual Water Use for Hydraulic Fracturing in Billion Gallons*

Garfield (CO) Encana, WPX 1.9

Karnes (TX) EOG, Plains 1.7

Weld (CO) Anadarko, Noble 1.3

Gonzales (TX) EOG, Penn Virginia 0.9

Glassock (TX) Apache, Laredo 0.9

Irion (TX) EOG, Apache 0.8

Reagan (TX) Pioneer, Laredo Petroleum 0.8

DeWitt (TX) BHP Billiton, ConocoPhillips 0.6

U.S. Extreme Water Stress Regions

Irion Weld Gonzales DeWitt Karnes Reagan Glassock Garfield FIGURE ES3:COUNTIES WITH HIGHEST WATER STRESS &

HIGH WATER USE FOR HYDRAULIC FRACTURING

* Hydraulic fracturing annual water use for 2012.

Water may have been sourced from outside county and from non-freshwater sources.

The table explores water use in context for counties in extreme water stress regions with high water use for hydraulic fracturing. Water use for hydraulic fracturing can be relatively high at the local level in comparison to domestic water use.

Source:WatervolumedatafromPacWestFracDBfromFracFocus.orgfor2012andcomparedtoU.S.GeologicalSurvey,domestic waterusedatafromlastsurveyyear,2005

Low Stress

Low - Medium Stress Medium - High Stress High Stress

Extremely High Stress Arid & Low Water Use • Well Location

Over 30 different counties used at least one billion gallons of water (roughly equivalent to daily water use of eight million people in New York City) for hydraulic fracturing operations during the report’s study period.

(9)

4 JenniferHiller,“SpendinginEagleFordforecastat$30Bthisyear,”San Antonio Express-News,January7,2014,

http://www.expressnews.com/business/eagle-ford-energy/article/Spending-in-Eagle-Ford-forecast-at-30B-this-year-5119298.php. 5 TomFowler,“SecondLifeforanOldOilField,”The Wall Street Journal,November19,2013.

Eagle Ford Play:

TheEagleFordinsouthTexasfacessomeofthebiggestwaterchallengesofanyshaleplay.The play’stotalwateruseforhydraulicfracturingwasthehighestinthecountry,19.2billiongallons, andwateruseperwellwasalsohigh,averagingover4.4milliongallons.Theregionismeeting anestimated90percentofwaterdemandfromgroundwaterwhileconcurrentlyexperiencing groundwaterdepletionchallenges.InDimmit,Zavala,andLaSallecounties,localaquiferlevels havedeclined100-300feetoverthepastseveraldecades.Thesecountiesarenowfacingnew andgrowingwaterdemandsfromrapidandintenseshaleenergydevelopment,whichwill createadditionalgroundwaterpressures.Capitalexpendituresforshaleenergydevelopment intheEagleFordisexpectedtoreach$30billionin2014aloneanddevelopmentisexpected tocontinueatarapidpace,potentiallydoublingproductionoverthenextfiveyears.4_Operators withcombinedlargefinancialandwaterriskexposuresincludeAnadarko,EOGResources, SMEnergy(SM),MarathonOil(MRO),ChesapeakeandMurphyOil(MUR).

Permian Basin:

ThePermianBasininwestTexasisanotherareawithwaterdemandpressures,drought concernsandhighgroundwateruseandconcurrentgroundwaterstress.Morethan70percent ofthePermian’swellsareinextremewaterstressareas—thebasinoverlapspartsofthedepleted OgallalaAquifer—andhydraulicfracturingwateruseisforecasttodoubleby2020.Although averagewateruseperwellismuchlowerthanintheEagleFord,thesheernumberofwells indevelopmentislarge,withover9,300wellsreporteddevelopedsincethebeginningof 2011.CapitalexpendituresinthePermianareexpectedtoreach$20billionthisyearand productionisexpectedtogrowto1.9millionbarrelsofoilperdayby2018,upfrom1.3million thisyear.5_{Ofthemanyoperatorsthathavecombinedhighfinancialandwaterstressexposure,} Apache(APA),Pioneer(PXD),Devon(DVN),OccidentalPetroleum(OXY),Cimarex(XEC), ConchoResources(CXO),Energen(EGN)andLaredoPetroleum(LPI)havethehighest.

Denver-Julesburg (DJ) Basin and Across the Rockies:

TheDJBasinintheNiobraraformationinColoradoisanotherregionwithintenseshale activity,muchofitcenteredinWeldCounty,withnearly2,900wellsdevelopedsince2011. It,too,isanareafacingextremewaterstress.Eighty-ninepercentofthewaterusedfor hydraulicfracturinginColoradowasconcentratedintwocounties:WeldandGarfield.Overall waterdemandforhydraulicfracturinginthestateisforecasttodouble,tosixbilliongallons by2015,morethantwicewhatthecityofBoulderusesinanentireyear.Withseveral municipalitiesvotingrecentlytobanorplacemoratoriumsonnewoilandgasdevelopment, thisregionisemblematicofthepressingneedforgreaterstakeholderengagementbythe industryonwatersourcingissuesandbeyond.Anadarko,withover1,200wellsdeveloped inthebasinsince2011,hasamajorpresenceintheregion. | Low Stress

(10)

6 FormapofplayorbasinlocationsseeAppendixA. |

California:

Nearlyallhydraulic-fracturingwateruseinCaliforniaisinregionsofextremelyhighwater stress,althoughwateruseperwellremainsrelativelylow.Mostoftheactivitytodatein CaliforniahasbeeninKernCounty,whichhaslargeagriculturalwaterdemandandagrowing population.OccidentalPetroleum,Aera(ownedbyShellandExxon)andXTOEnergyarethe operatorswiththelargestwateruseintheregionforhydraulicfracturing.Amongservice providers,BakerHugheshasthelargestwateruse.

Other Regional Plays:

Manyofthesmallershaleplays(100to2,000wells)arealsoinhighandextremelyhighwater stressregions,includingthePiceance,Uinta,GreenRiver,SanJuan,Cleveland/Tonkawaand AnadarkoWoodfordbasins.6

Company Findings:

Thereportalsoidentifiesthosecompaniesfacingthebiggestwatersourcingrisksboth regionallyandnationally.

• Anadarko Petroleum:Anadarkostandsoutashavinghighwaterriskexposureamong leadingshaleenergyproducers,withmorethan70percentofitswellslocatedinhighor extremelyhighwaterstressregions(especiallytheEagleFordandColorado’sDJBasin). Overthetimeframeofourstudy,thecompanyusedmorethansixbilliongallonsofwater initshydraulicfracturingoperations(Figure ES4).

• Apache, Encana and Pioneer:Mostofthewellsdevelopedbyeachofthesecompanies areinregionsofhighorextremewaterstress.

• Chesapeake Energy:Thiscompanywasbythefarthebiggestuserofwater,withmostof itswellslocatedinregionsofmediumwaterstress,includingtheEagleFord,Barnettand Marcellusregion.

• All of the top 10 operatorsbywateruse,exceptSouthwestern,hadthemajorityoftheir wellsinmediumorhigherwaterstressregions.Over250operatorsreportedwaterusedata toFracFocus,withthetop10accountingforabouthalfofthetotalwaterusednationally.

• The top 3 service providers:Halliburton,SchlumbergerandBakerHughes—accounted forabouthalfofthewaterusedforhydraulicfracturingnationally(Figure ES5).

Low Stress

(11)

|

Number of W

ells

FIGURE ES4:TOP TEN OPERATORS BY NUMBER OF WELLS & EXPOSURE TO WATER STRESS

Percent of Wells in Medium or Higher Water Stress Regions Area of circles represents total water use by operator

FIGURE ES5:TOP TEN SERVICE PROVIDERS BY WATER USE & WATER STRESS CATEGORY

Number of W

ells

Percent of Wells in Medium or Higher Water Stress Regions Area of circles represents total water use by service provider

Figure ES4:Top 10 operators by number of wells and exposure to water stress. Sources and type of water not reported.

Figure ES4:Top 10 service providers by number of wells and water stress exposure. Sources and type of water not reported. Approximately 15 percent of the wells did not have sufficient information to identify the service provider since service providers are not required to report to FracFocus.

Source:CeresanalysisusingWRIAqueduct WaterRiskAtlasincombinationwithwelldata fromPacWestFracDBfromFracFocus.org betweenJanuary2011-May2013.

(12)

|

Implications & Recommendations

Futurewaterdemandforhydraulicfracturingwillonlygrowwithtensofthousandsofadditional wellsslatedtobedrilled,andmanyshalebasinsandplaysarejustbeginningtobedeveloped. Inaddition,theshaledevelopmentbusinessmodelrequirescontinualdrillingcyclestomaintain productiongrowth. Allacrossthecountry,regulators,producersandserviceprovidersarescramblingtofind technologicalandregulatorysolutionstomitigatelocalizedwatersourcingrisksfromrapid shaleenergydevelopment.Somepocketsofsuccesscanbefound.Apache,forexample, isrecycling100percentofproducedwaterinthePermianBasin.AnadarkoandShellare buyingeffluentwaterfromlocalmunicipalities.Chesapeakeisreusingnearly100percent ofitsproducedwateranddrillingwastewaterintheMarcellusregion. Viewedmorewidely,however,watermanagementbestpracticesarelaggingandnosingle technologyalone—whetherrecycling,brackishwateruseorgreateruseofwaterlesshydraulic fracturingtechnology—willsolveregionalwatersourcingandwaterstressproblems.Ultimately, allshaleoperatorsandserviceprovidersshouldbedeployingavarietyoftoolsandstrategies— includingsubstantiallyimprovedoperationalpracticesrelatedtowatersourcing,morerobust stakeholderengagement,andstrongerdisclosure—toprotectfreshwaterresourcesforthe future.Investorsandlenders,inparticular,requirefullerdisclosureonwaterusetrendsand requirementstobetterbalancerisk-adjustedreturnsontheirdollarsinvested.Amongthe report’skeywater-sourcingrecommendationstooperators:

Disclosure & Transparency:

• Disclosetotalwatervolumesusedineachshaleplayorbasin,fromwherewaterisbeing sourced,includingprojectedfuturewaterneeds,thesecurityofsourcingoptionsand plans/targetsforreducingwateruse. • Disclosethepercentageofwateruseineachregionfromnon-freshwatersources, includingabreakdownofpresentuseandfutureusefromrecycling,brackishsupplies andothernon-potablewateruse.Includeinformationonhowmuchwaterreturnsto thesurfaceafterhydraulicfracturingtakesplace(flowbackwater)andduringoilorgas production(producedwater). • Disclosethepercentageofrevenues,operationsandfuturegrowthestimatescomingfrom regionswithhighwaterstressorareaswithdroughtandgroundwaterchallenges.

Operational Practices:

• Minimizewaterusethroughimprovementsinwaterefficiency,commitmentstorecycling orreusingwaterwhereviable,andsourcingfromnon-freshwatersources. • Collaborateandcooperatewithindustrypeersandotherindustriesonlocalwatersourcing challengesanddevelopinglocalwatersourcingandrecyclinginfrastructure. • Developlocalsourcewaterprotectionplansthatincludeaddressingregionalwaterrisks, engagingwithkeystakeholdersandsupportingprojectsthatimprovewatershedsandaquifers. • Minimizetheuseofaquiferexemptionsanddeepwellinjectiondisposalsites.

All shale operators and service providers should be deploying a variety of tools and strategies—including substantially improved operational practices related to water sourcing, more robust stakeholder engagement, and stronger disclosure—to protect freshwater resources for the future.

(13)

Stakeholder Engagement:

• Engagewithlocalcommunitiesonwaterneedsandchallengesbothbeforestarting operationsandaftertheybegin. • Establishandsupportprogramstoeducateandengageemployeesandsupplierstotake ownershipofwaterissues,includingincentivesforreducingwateruse. • Engageproactivelywithlocalandregionalregulatorsonwaterchallenges,including transparencyaboutwatermanagementplansandfuturewaterneeds. Finally,itiscriticalthatshaleenergycompaniesembedwaterriskandopportunityanalysis acrossallbusinessunits,fromtheboardroomtothedrillsite. |

(14)

1 U.S.EnergyInformationAdministration,“TechnicallyRecoverableShaleOilandShaleGasResources:AnAssessmentof137ShaleFormationsin41 CountriesOutsidetheUnitedStates,”June10,2013,http://www.eia.gov/analysis/studies/worldshalegas. 2 Forananimatedvideoillustratingtheprocess,see:http://ngm.nationalgeographic.com/2013/03/bakken-shale-oil/hydraulicfracturing-animation-video. 3 ModifiedfromSchlumbergerOilfieldGlossaryandWintershallwebsites,http://www.glossary.oilfield.slb.com andhttp://www.wintershall.com/en.html. 4 ModifiedfromUSGSNationalOilandGasAssessmentOnline(NOGAOnline)usingArcIMS, http://proceedings.esri.com/library/userconf/proc02/pap0826/p0826.htm.

Introduction

RegionsoftheUnitedStatesandCanadaareinthemidstofanextraordinaryenergyboom duetotwotechnologicaladvancesoftenusedtogether:hydraulicfracturingandhorizontal drilling.Hydraulicfracturingallowsoilandgasproducerstoliberateonceinaccessibleoiland gasreservestrappedinshaleformations.ItisestimatedthatU.S.oilandgasreserveshave grownby35percentand38percent,respectively,duetotheinclusionofshaleresources.1 Thehydraulicfracturingprocessusesacombinationofchemicals,sandandoftenlarge volumesofwaterunderhighpressure.Thewaterisdrawnfromsurfaceresources(lakes, rivers,reservoirs)andoftenfromgroundwaterresources(freshandbrackish/saline).This processfracturesundergroundformationsviahydraulicpressureandpropsopenthese fractureswithsandtoallowthetrappedoilorgastoflowtothesurface.2_{Hydraulicfracturing} isnowbeingutilizedtostimulatebothconventionaloilandgasreservoirsandunconventional reservoirssuchasshaleandtightoilandgasformations,whichhistoricallyhavebeentoo technicallychallengingandexpensivetoexploit.Thisreportfocusesprimarilyonwater-relatedissuesassociatedwithhydraulicfracturingandunconventionalshaleortightoil orgasformations,hereaftercollectivelyreferredtoas“shaleenergy.” |

Oil Field Definitions

Conventional Oil or Gas Deposits:Reservoirs of natural gas or oil, which have migrated to areas where the fluids/gases are pooled and sealed in place and from which they can readily flow into wellbores.

Unconventional Oil or Gas Deposits:Natural gas or oil which is still associated with the “parent-rock” from which it was formed, often of low permeability and unable to flow to the wellbore on its own. Tight and shale deposits are examples of unconventional oil or gas deposits. Coalbed methane production, also known as coal seam gas, can also be included as an unconventional energy resource.

Tight Oil or Gas Deposits:Areas where natural gas or oil gathers in pore spaces of rocks (mostly sandstone) and where gas or oil cannot flow freely to the wellbore.

Shale Gas or Oil Deposits:Locations where natural gas or oil is attracted to and trapped onto the surfaces of rock particles. More technically challenging procedures, with higher volumes of fluids are required to start the oil or gas flow to the wellbore than production for tight deposits.3_{Some view shale deposits as a subset of tight oil deposits.}

Play:A set of known or prospective oil and or gas accumulations sharing similar geologic and geographic properties such as source rock, migration pathways, trapping mechanisms, and hydrocarbon type.4_{Often “play” refers to regions that are commercially viable,}

whereas basins refer more closely to geologic characteristics.

Basin:A geological area defined by similar sedimentary characteristics. A basin can include multiple plays.

(15)

Water Definitions

Water Withdrawals:Volume of freshwater that is taken from surface or groundwater resources.

Water Consumption:Volume of freshwater that is taken from surface or groundwater resources and is not returned. There are concerns that hydraulic fracturing consumes a large amount of water. The water used in operations and pumped underground may remain in the well or be disposed elsewhere deep underground, making it unavailable for reuse. Water consumption metrics in most regions are poorly measured due to the lack of consistent water sourcing disclosure and measurement statistics of water returning to the surface.

Water Stress:Measures total annual water withdrawals (municipal, industrial and agricultural) expressed as a percentage of water available.5

This metric denotes the level of competition for water in a given region and is the focus of this study. The highest demand for water in most regions comes from agricultural or municipal uses followed by industrial uses. Water stress tends to be higher in regions of high population density or intense agricultural development. Water stress can be low even in arid regions such as North Dakota, where low population density and non water-intensive agricultural practices do not result in high water demand.

Water Scarcity:Is the volumetric abundance, or lack thereof, of freshwater supply and increasingly accounts for water flow required to maintain the ecological health of rivers and streams.

Water Risk:Refers to the ways in which water-related issues potentially undermine business viability.

Brackish Water:Water that is generally saltier than freshwater, but not as salty as seawater.6

Oil and Gas Water Definitions

Flowback Water:Water returning to the surface directly after hydraulic fracturing. This water is often mixed with water found in the geological formation. The amount and quality (often poor) of flowback water returning to the surface varies depending on local geologic conditions and hydraulic fracturing fluids utilized.

Produced Water:Water that returns to the surface along with the oil or gas that is being pumped from the well.

Recycled Water:Water utilized a second time in hydraulic fracturing operations after undergoing treatment for contaminants.

Reused Water:Water utilized a second time in hydraulic fracturing operations with minimal treatment requirements.

Maintenance Water:Water required to continue production over the life of a well. Some wells may require “flushing” with freshwater to prevent salt accumulation in pipelines.

Water Used for Enhanced Oil Recovery (EOR):When water is pumped underground to increase pressure in a well to boost lagging oil production (generally after a reservoir has been depleted). EOR can require far larger volumes of water than the average well requirements for hydraulic fracturing operations.

Drilling Water:Water that is used, often in conjunction with other chemicals, to cool and lubricate the drill bit and carry out drill cuttings during the drilling of the borehole.

5 SeewhitepaperbyFrancisGassert,MattLandis,MattLuck,PaulReigandTienShiao,“AqueductMetadataDocument,AqueductGlobalMaps2.0,” January2013. 6 Saltconcentrationsforbrackishwaterareestimatedtobeover1,000ppm.Incomparisonseawatercontainsover35,000ppmsaltcontent.U.S. GeologicalSurvey,“NationalBrackishGroundwaterAssessment,”http://ne.water.usgs.gov/ogw/brackishgw/brackish.html.Seealso,“Brackish GroundwaterBrief,”NationalGroundwaterAssociation,July21,2010. Waterisanintegralpartofeverystepinshaleenergyextraction,andwaterrequirementsper wellhavegrownsignificantly,oftenreachingfivetosixmilliongallonsperproductionwell.Just asimportantly,hydraulicfracturingandhorizontaldrillinghaveledtotheindustrializationof manyruralareas,withsomeU.S.countiessupportinghundredsandeventhousandsofwells. TensofthousandsofwellshavebeendrilledintheU.S.andCanadatodateandthousands morearebeingdevelopedeveryyear.Thishighdensitydrillinganddevelopmentrequires alargearrayofsupportinginfrastructure,includingnewroads,wellpads,waterreservepits andtanks,disposalwells,pipelinesandcompressorstations(Figure 2). |

(16)

7 Krupnick,GordonandOlmstead,“PathwaystoDialogue:WhattheExpertsSayabouttheEnvironmentalRisksofShaleGasDevelopment,”Resources fortheFuture,February2013.

8 CommunitiesfacedcontaminationconcernsinColoradorecentlyasregionswithhighdensityofshaledevelopmentoperationswerehitbyfloodingthat overturnedtanksandfloodedwastewaterstorageponds.SeeTrowbridge,Alexander,“ColoradoFloodsSpurFrackingConcerns,”CBSNews, http://www.cbsnews.com/news/colorado-floods-spur-hydraulicfracturing-concerns.

9 PatrycjaRomanowska,“AlbertaDesperatelyNeedsaWater-ManagementPlan,”Alberta Oil,July29,2013, http://www.albertaoilmagazine.com/2013/07/alberta-and-the-life-aquatic/.

Water Sourcing Risks in Shale Energy Development

Anydiscussionoftheindustry’sexposuretowater-relatedrisks(aswellasotherenvironmental andsocialrisks)mustbeframedinthebroadercontextofshaleenergydevelopment,whichlooks beyondthewellpadandthenarrowactivityofhydraulicfracturing.Whilemostenvironmental concernsaroundhydraulicfracturinghavefocusedonthemigrationofhydraulicfracturing chemicalsandmethaneintogroundwater,thisisjustoneofmanyrisksthathydraulicfracturing potentiallyposestosurfaceandgroundwaterresources.ResourcesfortheFuturerecently conductedasurveyof215academic,industry,NGOandregulatoryexpertsinshaleenergy development,andfoundbroadconsensuson12riskpathways,withsevenfocusedonpotential waterimpacts.Concernsoverbothsurfaceandgroundwaterwithdrawalswereamongthoserisks.7 Thisreportfocusesonlyonmaterialrisksfacingtheindustryrelatedtowatersourcingand thepotentialimpactsonsurfaceandgroundwaterresources(Stage1inthewaterlifecycle ofhydraulicfracturingoperationsshowninFigure 1).Otherwaterriskpathwayssuchasspills, accidentsandwastewatermanagement,althoughimportant,arebeyondthescopeofthisreport.

|

FIGURE 1:HYDRAULIC FRACTURING WATER USE CYCLE

Source:EPAhttp://www2.epa.gov/hfstudy/hydraulic-fracturing-water-cycle.

Simple schematic of five stages of the hydraulic fracturing water lifecycle. This study focuses on stage number one.

Water is a Challenge

in Most Regions

From:“Alberta Desperately Needs a Water-Management Plan, Alberta Oil,” July 2013

“Water is the biggest challenge we have right now in any shale play,” Mike Wood, Vice President, Talisman Energy, Canada Shale Division.9

Watersourcingrisksfallintothreebroadcategories:physical,regulatoryandreputational.Physical waterrisks—thelackoroverabundance(i.e.flooding)8_{ofwaterinaparticularplaceandresulting}

(17)

FIGURE 2:WATER SOURCES FOR HYDRAULIC FRACTURING OPERATIONS

Source: U.S. EPA Study of the Potential Impacts of Hydraulic Fracturing, Progress Report, December 2012.

11 CathyProctor,“FrackingBanApprovedinBroomfieldAfterVoteFlip,ButRecountisPlanned,”Denver Business Journal,November15,2013. 12 TheCanadianPress,“NewfoundlandShutsDooronFrackingApplicationsPriortoReview,”The Globe and Mail,November4,2013. 13 DavidJolly,“FranceUpholdsBanonHydraulicFracturing,”The New York Times,October11,2013.

14 MikeLee,“ParchedTexansImposeWater-UseLimitsforFrackingGasWells,”Bloomberg Businessweek,October6,2011, http://www.businessweek.com/news/2011-10-06/parched-texans-impose-water-use-limits-for-fracking-gas-wells.html. companieswillface.Inthecaseofshortages,alternativewateracquisitionstrategiessuchas importingorrecycling/reusingwaterrequiresignificantincreasesinoperatingandcapital expenses.Water-relatedriskscanalsoincludehowwaterresourcesareregulatedandallocated (regulatoryrisks),aswellashowkeystakeholders—communities,customersandothergroups— viewacompany’simpactontheresource(reputationalrisks).Wateruseinvolvesapotentmix ofeconomic,socialandenvironmentalvalues.Aspressureonsuppliesincreaseandunderlying resourcesaredegraded,regulatorsmustmakeincreasinglytoughdecisionsonhowlocalwater suppliesaretobeallocated.Conversely,businessesoperatinginareaswithlittleorpoorlyenforced regulationmayfacerisksduetomisuseanddepletionofcommonwaterresources,whichcan negativelyimpactallparties.Ultimatelycommunityconcernsaboutcompetitionforwatercan beasignificantdriverofreputationalriskandcanjeopardizetheindustry’ssociallicense tooperateatthemunicipal,state,provincialand/ornationallevel.11,12,13 |

Water Competition

with Urban Centers

From:“Parched Texans Impose Water-Use Limits for Fracking Gas Wells,” Bloomberg News, October 2011

Increasing drought concerns, growing competition between agriculture, municipal and industrial users have prompted some cities and districts to place restrictions on the use of water for hydraulic fracturing. The city of Grand Prairie, Texas in the Barnett Shale, in August [2011] became one of the first to ban the use of city water for hydraulic fracturing.14

Water Sources for Hydraulic Fracturing

Waterforhydraulicfracturingcanbesourcedfromsurfacewater,groundwater(fresh andsaline/brackish),wastewaterstreamsorwaterrecyclingfacilities(Figure 2).The nomadicandtransientnatureoftheindustryhascreatedchallengesforthosetryingto studywater-sourcingimpacts.Oftenthereisinconsistentornodataavailableonwhere industryissourcingwater,whentheyaresourcing,howmuchisbeingsourced,what typeofwaterisbeingsourced(e.g.freshversusrecycled)andhowmuchisbeing consumed(eliminatedfromthehydrologicalwatercycle).Timingandlocationof withdrawalsisalsopoorlyunderstoodanddocumented,aproblemmademoreacute giventhatwaterneedsforhydraulicfracturingcanspikeovershorttimeframes.These intenseandrapidwithdrawalscanstressriversecosystemsandcompetitionforother endusers,especiallyinregionspronetodroughtandlowseasonalflows.

(18)

|

National Water

Use Trends &

Water Sourcing Risks

ThisreportanalyzeswaterusebyhydraulicfracturingoperationsintheU.S.andwestern Canadaandexplorestheextenttowhichthisactivityistakingplaceinareasofwaterstress, droughtandgroundwaterdepletion.ResearchofU.S.trendsisbasedonoilandgaswell dataavailableatFracFocus.org,aswellasdatafromtheU.S.GeologicalSurvey,theNational DroughtMitigationCenterandtheWorldResourcesInstitute’s(WRI)Aqueductwaterriskatlas. AnalysisofCanadiandataisfocusedonwellsinAlbertaandBritishColumbia,astheseare theonlyprovincescurrentlyreportingtoFracFocusCanada,althoughhydraulicfracturingis takingplaceinotherpartsofthecountry.Ahigh-leveloverviewofCanadiantrendsisincluded intheregionalsectionofthisreport.Foradetaileddiscussionofmethods,seeAppendix A. Institutionsthatinvestinandlendtotheshaleenergysectorcanbettermanagetheirexposure towatersourcingrisksandimprovetheirrisk-returnanalysis,duediligenceandengagement withcompaniesiftheyhaveabetterunderstandingofthreekeywaterrisksthatimpactshale development:(1)competitionforwater(waterstress);(2)exposuretogroundwater-stressed regions,and;(3)exposuretoregionsexperiencingdrought.Allthreeelementscanoverlap. Forexample,regionsexperiencingdroughtoftenhavehighergroundwaterpumpingand depletionrates,whichcanleadtogreatercompetitivepressuresforwater.Exposuretooneorany combinationofthesethreerisksraisestheoverallriskprofileofanoperatororserviceprovider. Regions experiencing drought often have higher groundwater pumping and depletion rates, which can lead to greater competitive pressures for water.

(19)

Type of Wells Reported: 15 ExtrapolatingfromtheEPA’sestimatesthat“70to140billiongallonsrequiredforhydraulicfracturingbeingequivalenttothetotalamountofwater usedeachyearinroughly40-80citieswithapopulationof50,000”inEPA’sDraftPlantoStudythePotentialImpactsofHydraulicFracturingon DrinkingWaterResources,February2011. |

United States

WATER USE TRENDS Number of Wells

Used to Calculate Water Volume Data:

39,294

TotalWater Use (gallons):

97.5 billion

AverageWater Use (gallons/well):

2.5 million

EXPOSURE TO WATER RISKS

Proportion of Wells in High or Extreme Water Stress:

48%

Proportion of Wells in Medium or Higher Water Stress:

73%

Proportion of Wells in Drought Regions(as of Jan. 7, 2014):

56%

LOCAL WATER USE IMPACTS

Water Use in Top 10 Counties

as Proportion of Water Use Nationally

Number of Countieswith Hydraulic Fracturing Activity:

402

Highest Water Use by a County(gallons):

Dimmit County, Texas

4 billion

U.S. Data Summary (January 1, 2011 - May 31, 2013) as reported by FracFocus

28%

47% Gas

Oil 53% OPERATING TRENDS

Water Use Trends

for Hydraulic Fracturing

Number of Operators Reporting to FracFocus (1st Quarter 2013)

253

OPERATORS

Top Three in U.S. by Water Use: • Chesapeake

• EOG • XTO

SERVICE PROVIDERS Top Three in U.S. by Water Use: • Halliburton

• Schlumberger • Baker Hughes

National Water Use Trends

AccordingtoU.S.FracFocusdatafor39,294wells,justover97billiongallonsofwaterwere usedbetweenJanuary2011andMay2013forhydraulicfracturingoperations,equivalent totheannualwaterneedsofover55citieswithpopulationsofapproximately50,000each.15 Itshouldbestressedthatinformationontheproportionofwaterthatwassourcedfromnon-freshwatersourceswasunavailablebothfortheU.S.andCanadasinceoperatorsdonot reportthisdatatoFracFocusnortomoststateorprovincialdatabases.

(20)

16 Fordetailedanalysisofwatervolumetrendsbyhydraulicfracturingfluidsystemtypesee:ChristopherRobartetal,“AnalysisofU.S.Hydraulic FracturingFluidSystemTrends,”Society of Petroleum Engineers 163875,February2013.

17 YusukeKuwayama,Olmstead,andKrupnick,Alan,“WaterResourcesandUnconventionalFossilFuelDevelopment:LinkingPhysicalImpactsto SocialCosts,”ResourcesfortheFuture,DP13-34.November6,2013,SSRN:http://ssrn.com/abstract=2352481 or

http://dx.doi.org/10.2139/ssrn.2352481.

|

FIGURE 3:AVERAGE WATER USE PER WELL BY TYPE OF PRODUCTION

Well Production Type

AveragewateruseperwellishigheringasdominatedplaysliketheEagleFord,thanintheoil richBakkenandPermianregions(Figure 4).Mosthydraulicfracturingisnowtakingplacein oilproducingregions:72percentofwellshydraulicallyfracturedinthefirstfivemonths of2013 wereoilwells. Ifaveragewateruseperwellisrisinginaregion,thismightindicatethathorizontal(lateral)lengths ofpipesaregrowing.Longerhorizontalpipesmaydecreasetheamountofwellsthatneedtobe developed,andpossiblytheenvironmentalsurfacefootprint,asthelongerlaterallengthsofpipe canreachagreaterareaoftargetedoilorgasresources.However,dataislackingonwateruseas itisrelatestolengthofhorizontalpipes.Bothsetsofdatamaybereportedtoregulators,butlittle research,beyondTexas,haslookedattherelationshipbetweenthetwo.Havingdataonwateruse perfootoflateralpipewouldbethemostproductivewaytocomparewaterusebetweenoperators. Basedonavailabledata,itappearsthatshaledevelopmentiscomparabletootherenergysources suchasbiofuelsandoilsandswithrespecttowateruseperunitofenergyproduced.17_However, itmaystillbetooearlytofullymeasureshaleenergy’swaterrequirementssinceitisunclear howoftenwellswillberefrackedorhowmuchwaterisrequiredforwellmaintenance. Source:CeresanalysisusingPacWestFracDBfromFracFocusdatafromwellsdrilledJanuary2011-May2013.

Average Water Use Per Well:

Key Drivers and Trends by Play or Basin

Themostimportantfactorsthatdrivewateruseperwellarethetypeofproduction(oilorgas) andthedirectionofdrilling(verticalorhorizontal).Otherfactorsincludethecharacteristicsof thelocalgeologyandthetypeoffluidsystembeingdeployedinhydraulicfracturing,suchas waterfracs,acidfracsandenergizedfracs.16_{Gasproductionismorewater-intensivethanoil,} andhorizontaldrillingisfarmorewater-intensivethanverticaldrilling(Figure 3). 4.8 M 3.2 M 0.7 M 0.5 M

(21)

18 FordetailsonwaterstresscalculationseewhitepaperbyFrancisGassert,MattLandis,MattLuck,PaulReigandTienShiao,“AqueductMetadata Document,AqueductGlobalMaps2.0,”WorldResourcesInstitute,January2013.

19 WoodMacKenzie“TroubledWatersAhead?Risingwaterrisksontheglobalenergyindustry,”Global Horizons Service Insight,October2013.

Water Sourcing Risks:

Water Stress & Growing Competitive Pressures for Water

Nearlyhalfofthe39,294reportedhydraulicallyfracturedwellsdrilledintheU.S.since2011 (justover18,000wells)areinregionswithhighorextremewaterstress(Figure 5).Over28,000 wells,or73percent,arelocatedinregionsofatleastmediumwaterstress.Inextremewater stressregions,municipal,industrialoragriculturalusersarealreadyusingover80percentof theannualavailableflows(frombothsurfacewaterandshallowgroundwater).Inhighstress regions,40to80percentisalreadyallocated.18_{Inshort,hydraulicfracturingislargelytaking} placeinregionsalreadyexperiencinghighcompetitionforwater.Atthegloballevel,asimilar patternisunderway.19 Shaledevelopmentfacessignificantexposuretowaterstressinkeyoilandgasproducing states(Figure 6).InTexas,nearlyhalfthewellsareinareaswithhightoextremelyhighwater stress.InColorado,97percentofwellsareinregionswithhighorextremelyhighwaterstress. InCalifornia,NewMexico,WyomingandUtah,mostofthewellsareinregionswithhighor extremelyhighwaterstress.

Asimilarpatternemergeswhenanalyzingthedatabyshaleplayorbasin(Figures 7 and 8). ThetopfiveU.S.shaleenergyregions—EagleFord,Marcellus,Permian,BarnettandHaynesville— accountforover70percentoftotalnationalwaterusedinhydraulicfracturing.ThePermian, EagleFordandDJbasinshaveanywherefromone-thirdtonearly100percentoftheirwellsin areaswithhighorextremelyhighwaterstress.Bycontrast,eventhoughNorthDakota’sBakken isaveryarid,itisnotdenselypopulated,sowaterstressisnotashighasinothershaleplays. | Gallons of W ater (Millions)

FIGURE 4:AVERAGE WATER USE BY MAJOR PLAY

Date = x

Average water use for major plays/basins from the first quarter of 2011 to end of the first quarter of 2013. Average water use can increase due to technical or geologic factors, movement from vertical to horizontal drilling or increasing length of pipes used in horizontal drilling.

Source:CeresanalysisusingPacWestFracDBfromFracFocus.org.

Hydraulic fracturing is largely taking place in regions already experiencing high competition for water. At the global level, a similar pattern is underway.

(22)

|

FIGURE 5:NORTH AMERICAN WATER STRESS & SHALE ENERGY DEVELOPMENT

25,450 May 2013 map 39,294 US+ 1,341 CA December 2013 map

A database of hydraulically fractured wells is overlaid on a map of baseline water stress in the United States and two Canadian provinces for which we have data. This map measures the ratio of water withdrawal to mean annual available supply, and shows where there is high competition for limited water resources among users. Red areas on the baseline water stress map are places where a large portion of available water supply is already being used. The gray areas are dry and undeveloped. Black dots on the map represent wells hydraulically fractured.

For interactive map, see ceres.org/shalemap. Source: WRI Aqueduct Water Risk Atlas in

combination with well data from PacWest FracDB from FracFocus.org and FracFocus.ca between January 2011-May 2013 for the U.S., December 2011-July 2013 for British Columbia and December 2012 - July 2013 for Alberta.

Number of Shale Oil & Gas Wells

TheEagleFordplayinsouthTexashadthehighesttotalwateruse,over19billiongallonsinthe report’sstudyperiod,followedbytheMarcellus,Permian,BarnettandHaynesvilleplays.The EagleFordisaregionofparticularconcernduetohighlyconcentrateddrillingactivity,waterstress, drought,groundwaterconcernsandrelativelyhighwateruse—about4.4milliongallonsper well(seetheEagleFordandPermianRegional Case Studies).

ThePermianBasininwestTexasandsoutheastNewMexicofacessimilarwatersourcing challengestotheEagleFordwithonekeydifference:averagewateruseperwellisrelatively lowatabout1.1milliongallonsperwell.Still,thisregionwarrantsconcernduetothehigh levelofcurrentshaleenergyactivityandexpectedgrowth.TheDJBasin,whichliesprimarily inColoradowithsomeoverlapintoWyoming,KansasandNevada,alsohashighexposureto extremewaterstress.WeldCounty,anareaexperiencingextremewaterstresslocatedwithin Colorado’sDJBasin,recentlysawthedevelopmentofnearly2,900newwells.

(23)

|

FIGURE 7:TOP 15 PLAYS BY WATER USE

Total Water Use (Billions of Gallons)

FIGURE 8:NUMBER OF WELLS DRILLED BY WATER STRESS CATEGORY & PLAY

Number of Wells

Baseline Water Stress:

Extremely High (>80%) High (40-80%)

Medium to High (20-40%) Low to Medium (10-20%) Low (<10%)

Arid & Low Water Use

Only plays/basins with 500+ wells represented.

The Eagle Ford play in south Texas had the highest total water use, over 19 billion gallons in the report’s study period, followed by the Marcellus, Permian, Barnett and Haynesville plays.

FIGURE 6:STATES WITH MOST REPORTED HYDRAULIC FRACTURING ACTIVITY BY WATER STRESS CATEGORY

Number of Wells

States with less than 100 wells excluded. West Virginia California Louisiana New Mexico Wyoming Arkansas Utah Oklahoma North Dakota Pennsylvania Colorado Texas Source:CeresanalysisusingWRIAqueduct WaterRiskAtlasincombinationwithwelldata fromPacWestFracDBfromFracFocus.org betweenJanuary2011-May2013. In Colorado, 97 percent of wells are in regions with high or extremely high water stress. Texas leads in number of wells hydraulically fractured.

In Wyoming, New Mexico and California the majority of wells have been

developed in regions of high or extreme water stress

(24)

|

Manyofthesmallerplays/basins(100to2,000wellsdevelopedsince2011)arealso experiencinghighandextremewaterstress,includingthePiceance,Uinta,GreenRiver, SanJuan,Cleveland/TonkawaandAnadarkoWoodfordplays.InAlberta,oneoftheonlytwo provinceswhereFracFocusdataisavailable,14percentofwellsareinregionsofhighwater stress(seeRegional Case Studies).

Water Sourcing Risks: Drought Conditions Affecting Many Regions

Fifty-sixpercentofhydraulicallyfracturedwellsintheUnitedStatesareinregionsexperiencing short-tolong-termdroughtconditions(Figure 9).Areasexperiencingprolongeddrought conditionsincludeCaliforniaandmuchofTexas,Colorado,Oklahoma,NewMexico,Arkansas andLouisiana.Operatingindroughtconditionsmakesitmoredifficulttophysicallysourcewater. Itcanalsoleadtoincreasinggroundwaterdepletion,competitivepressuresoverexistingwater resourcesandlossofsocial-license-to-operate.

FIGURE 9:U.S. DROUGHT MONITOR MAP & SHALE ENERGY DEVELOPMENT

A database of hydraulically fractured wells is overlaid on the U.S. Drought Monitor map of the week of January 7, 2014. Over 55% of the 39,294 wells overlaid on the map are in regions experiencing drought conditions. The U.S. Drought Monitor has been publishing weekly drought maps since 1999 and details about the map can be found at:

http://drought.unl.edu/MonitoringTools/USDroughtMonitor.aspx For interactive map, see ceres.org/shalemap.

Source: Well data from PacWest FracDB / FracFocus.org.

Well data reflects reporting of wells hydraulically fractured between 01/2011 - 05/2013.

Abnormally Dry Moderate Drought Severe Drought Extreme Drought Exceptional Drought Normal Conditions Drought Intensity:

(25)

20 JamesNash,“WaterBondsShrivelasCaliforniaSeesDriestYear,”Bloomberg,January1,2014.

21 PGBené,etal,“NorthernTrinity/Woodbineaquifergroundwateravailabilitymodel:assessmentofgroundwateruseinthenorthernTrinityaquiferdue tourbangrowthandBarnettShaledevelopment,”ReporttotheTexasWaterDevelopmentBoard,2007,

http://www.twdb.state.tx.us/groundwater/models/gam/trnt_n/trnt_n.asp.

22 JPNicotandBridgetScanlon,“WaterUseforShale-GasProductioninTexas,”U.S. Environmental Science and Technology,March2012. 23 M.Giordano,“GlobalGroundwaterIssuesandSolutions,”The Annual Review of Environment and Resources,34,153-187,2009.

24 Confinedaquifersexistinsomeregionsandcontainfossilizedwatertrappedinsomecasesmillionsofyearsago.Theseaquifersareconsideredanon-renewableresource.

25 ThomasWinteretal,“GroundWaterandSurfaceWater,ASingleResource,”U.S.GeologicalSurveyCircular1139,1989.

Water Sourcing Risks:

Groundwater Depletion a Growing Concern

Shaledevelopmentinmanyregionsishighlyreliantongroundwaterresources,whichare generallylessregulatedthansurfacewaters,thusincreasingrisksofwaterresourcedepletion andwatercompetition.MostwatersourcedforhydraulicfracturinginTexas,forexample, comesfromgroundwatersources,yetthereisnoconsistentrequirementthatgroundwater usedforhydraulicfracturingbereported,monitoredorpermitted.21,22 Overuseofgroundwaterisanincreasinglyseriousproblemthatleadstolandsubsidence, reductionsinsurfacewaterflowsandultimatelyunsustainablewatersupplies.23_Groundwater sources—fromwaterinthesoiltodeepaquifers—areinterconnectedwithoneanotherand withsurfacewaterresources.Precipitationultimatelyreplenishesgroundwatersupplies, butinmanycasesthisprocesscantakedecades,ifnotcenturiesorevenlonger(Figure 10).24 Surfaceandgroundwaterareinreality,asingleresourcealthoughregulatorsandend-users often havehistoricallyviewedthemseparately.25 |

Growing Water Concerns

in California, Impacting

Bonds

From:“Water Bonds Shrivel as California Sees Driest Year,” Bloomberg, January 2014

About two-thirds of Californians get at least part of their water from northern mountain rains and snow through a network of reservoirs and aqueducts known as the State Water Project, according to a December 16 report by the Water Resources Department. The water content of the snowpack is about 20 percent of normal for this time of year, the Water Department said December 30 in a statement. The system supplies households and businesses from the San Francisco Bay area to Southern California and irrigates crops in the San Joaquin Valley near the center of the state—the world’s most productive agricultural region. With reservoirs at 66 percent of average, and a third dry year predicted, revenue is likely to fall short for the Water Resources Department and the local agencies that depend on it, Moody’s Investors Service said in a December 5th note. That may harm the credit of such authorities as the Metropolitan Water District of Southern California, currently rated Aa1, second-highest, the company said. Lower credit ratings mean higher borrowing costs.20

FIGURE 10:SURFACE & GROUND WATER RESOURCES

Interconnected nature of surface and groundwater resources. This diagram shows groundwater supplying surface water resources. In some regions flows are reversed with surface water leaching into groundwater. Travel times of groundwater from recharge areas to various aquifers can take anywhere from days, years, centuries to millennia.

(26)

26 EdwardVaughanetal,“WaterforTexas2012StateWaterPlan,“TexasWaterDevelopmentBoard,January2012.

27 LeonidKonikow,U.S.GeologicalSurvey,“GroundwaterDepletionintheUnitedStates(1900-2008),”Scientific Investigations Report2013-5079,May 14,2013. 28 TomGleeson,YoshihideWada,MarcBierkensandLudovicusvanBeek,“WaterBalanceofGlobalAquifersRevealedbyGroundwaterFootprint,” Nature,Vol.488,August9,2012. Policymakersareincreasinglyrecognizingthatregionaleconomicrelianceongroundwater inmanyregionsmaynotbesustainableandthatgroundwaterwithdrawalsbyallusersmust becarefullybalancedwithdeclininggroundwaterlevelsandimpactsonsurfacewaterflows. Addingtothecomplexityofthischallengeareprolongeddroughtconditions,growingclimate changeimpactsandanticipatedpopulationgrowthinmanyoftheseshaleoilandgas producingregions.Texas,Colorado,Oklahoma,Wyoming,NewMexicoandCaliforniaare allexpectedtoexperience20percentorhigherpopulationgrowthbytheendofthisdecade (Figure 11).Texasisprojectedtoexperience80percentpopulationgrowthby2060.26 ArecentU.S.GeologicalSurvey(USGS)reporthighlightsthesystematicover-exploitationof 40majorU.S.aquifers,withthehighestlossratesbeingfrom2000to2008(nearly25cubic kilometersonaverageperyear).27_{Majorshaleenergyactivityanddepletedaquifersoverlap} intheHighPlains(Ogallala)aquifer(includingpartsofthePermianBasin),California’sCentral ValleyaquiferandintheRockies.Inalloftheseregions,withdrawalsfromaquifersgreatly exceedrechargerates.28_{Ofthe39,294wellsstudied,36percentoverlayregionsof} groundwaterdepletion(Figure 12). |

FIGURE 11:WATER RESOURCE STRESS & POPULATION GROWTH, 2000-2020

Water Supplies are Vulnerable

Population Growth is 20% to 50% in Most Water-Stressed Areas

More Water Less Water

Source:DOE/NETL(M.Chan,July2002

U.S. Population will increase significantly (double over next 100 years)

Many areas of high water stress are also expected to see high population growth through 2020. Texas, Colorado, Wyoming, New Mexico, Oklahoma and California face expected population growth, water stress and shale energy development.

Source:SandiaNationalLabs,“Energy-WaterNexusOverview,”http://www.sandia.gov/energy-water/nexus_overview.htm.

Policymakers are increasingly recognizing that regional economic reliance on groundwater in many regions may not be sustainable and that groundwater withdrawals by all users must be carefully balanced with declining groundwater levels and impacts on surface water flows.

(27)

29 IntegratedPipelineProgramManagementOffice,TarrantRegionalWaterDistrict,http://www.iplproject.com/about-the-ipl/. 30 Onebilliongallonsistheequivalentofroughly1,500Olympic-sizedswimmingpools.

Local-Level Water Use Impacts:

The Best Scale for Understanding Water Sourcing Risks

Companyexposuretoshalewaterrisksisbestunderstoodattheregional,municipalorcounty level.Forexample,inseveralcountiesintheEagleFord,waterdemandforhydraulicfracturing isprojectedtoreachlevelsequivalenttoall thewaterbeingusedbyall theresidentsinthe county.Countiesreliantonlocalgroundwatersourcesorsmallwaterreservoirs,andwhich haveminimalresourcestobuildwater-supplyinfrastructuretoimportwater,areparticularly vulnerabletotheimpactsofgreatershaleindustrydemandforwater.Largermunicipalities withgreaterfinancialresources,infrastructureandabilitytoimportneededsuppliesare betterabletoabsorbhigherwaterdemand.Forexample,intheFortWorth/TarrantCounty areainTexas,hydraulicfracturingwaterdemandsareveryhigh,butcanlikelybepartially metbysourcingwaterfrombeyondcountyborders.29_{However,evenlargejurisdictionswill} bechallenged—physically,financiallyandpolitically—tomeetfuturedemand. SeveralU.S.counties,includingeightinextremewaterstressregions,haveusedmorethanone billiongallonsofwaterforhydraulicfracturing(Figure 13).30_{Formanyoftheseregionsthere}

isnodataavailableregardingwherethiswaterisbeingsourcedandhowmuchderivesfrom non-freshwaterresources.WeldCounty,locatedinColorado’sDJBasin,providesanexample ofjusthowdensewelldevelopmentcanbewithinonecounty(Figure 14).Amongtheseimpacts arehundredsoftruckssupplyingwatertoeachandeverywellpadforhydraulicfracturing.

|

FIGURE 12:GROUNDWATER DEPLETION & SHALE ENERGY DEVELOPMENT

Groundwater Depletion in Cubic Kilometers

A U.S. Geological Survey map of cumulative groundwater depletion, from 1900 - 2008, in 40 major aquifer systems overlaid by 39,294 hydraulically fractured oil and gas wells (black dots). For interactive map, see ceres.org/shalemap.

Source: Well data from PacWest FracDB from FracFocus.org between January 2011-May 2013 and U.S. Geological Survey Scientific Investigations Report 2013-5079.

(28)

|

FIGURE 13:HIGHEST WATER USE COUNTIES BY WATER STRESS CATEGORY

Gallons of Water (Billions)

Counties with 1 billion gallons or more water use only. Water used in the county may be sourced from outside the region and may come from non-freshwater sources. Source:CeresanalysisusingWRIAqueductWaterRiskAtlasincombinationwithwelldatafromPacWestFracDBfromFracFocus.org betweenJanuary2011-May2013. FIGURE 14: WELD COUNTY IN THE DJ BASIN OF COLORADO

The density of hydraulic fracturing is evident by zooming into the region. Closer analysis of regional well development also available at

www.ceres.org/shalemaps

(29)

InTable 1,wateruseforhydraulicfracturingfor2012iscomparedtoannualresidentialwater usefor2005,themostrecentyearforwhichdatawasavailable.Waterusedineachcounty forhydraulicfracturingisoftenmanytimeshigherthanwaterusedfordomesticresidential wateruse,highlightinghowatthisgeographicscale,waterdemandforhydraulicfracturing canpotentiallystrainlocalcommunities. Wateruseincertaincountiescanbeveryhighbecauseshaledevelopmenttendstoconcentrate in“sweetspots”wherewellsmaybeparticularlyproductive.Asaresult,developmentoften focusesonasmallnumberofcountieswithineachplayorbasin.Forexample,ineachofthree majorplays/basins—theUintainUtahandthePiceanceandDJBasinscenteredinColorado— morethan80percentofwellsareconcentratedwithinthreecountiesorfewer(Figure 15). Inmanyoftheothermajorplays/basins,welldevelopmentwithinthetopthreecountiesisa significantpercentageofthetotalnumberofwellsdevelopedintheentireplay/basin. |

High Water Use & Stress County

Population Annual Water Use for Hydraulic Fracturing in Billion Gallons*

Water Use for Domestic Supply in Billion Gallons**

Hydraulic Fracturing Water Use as Proportion of Domestic Water Use

Top Two Operators By Water Use

Garfield (CO) 49,810 1.9 5.3 36% Encana, WPX

Karnes (TX) 15,351 1.7 .8 213% EOG, Plains

Weld (CO) 228,943 1.3 8.9 15% Anadarko, Noble

Gonzales (TX) 19,587 0.9 1.8 50% EOG,

Penn Virginia

Glassock (TX) 1,327 0.9 0 NA Apache, Laredo

Irion (TX) 1,756 0.8 .03 2667% EOG, Apache

Reagan (TX) 2,995 0.8 .4 200% Pioneer,

Laredo Petroleum

DeWitt (TX) 20,507 0.6 .8 75% BHP Billiton,_{ConocoPhillips}

* Hydraulic fracturing annual water use for 2012. Water may have been sourced from outside county and from non-freshwater sources. **All withdrawals for domestic supply (both fresh and saline) in county. From USGS 2005 national water survey.

U. S. Extreme Water Stress Regions

Irion Weld Gonzales DeWitt Karnes Reagan Glassock Garfield TABLE 1:COUNTIES WITH HIGHEST ANNUAL WATER USE IN EXTREME WATER STRESS REGIONS

FIGURE 15:PERCENTAGE OF WELLS IN TOP THREE MOST ACTIVE COUNTIES PER PLAY

Percent of Wells Drilled

First County Second County Third County

Table 1:Water use for hydraulic fracturing can be relatively high at the local level in comparison to domestic water use.

Source:CeresanalysisusingWRIAqueductWaterRisk AtlasincombinationwithwelldatafromPacWestFracDB fromFracFocus.orgbetweenJanuary2011-May2013.

Figure 15:Proportion of wells developed in top three counties by activity versus all wells developed for entire play/basin.

(30)

31 Thereareahandfulofcompaniesthatareverticallyintegrated,suchasPioneer. 32 Inadditiontotheenvironmentalimpactsfromminingthesand,theseoperationsalsorequirealargeamountofwatertowashandsortthesand.See http://www.fracdallas.org/docs/sand.html andhttp://dnr.wi.gov/topic/Mines/documents/SilicaSandMiningFinal.pdf. 33 Publicly-listedsandsuppliersforhydraulicfracturingincludeUSSilica(SLCA)andHi-Crush(HCLP).EOG,PioneerandHalliburtonalsoownsand miningoperationsforhydraulicfracturing. |

Company Exposure to

Water Sourcing Risks

Thischapteranalyzesthewaterriskexposureofshaleenergyoperatorsandserviceproviders (seeAppendices B and Cforfulldata).Operatorsmakestrategicexplorationandproduction decisionsandareultimatelyliablefortheenvironmentalimpactsofproduction,whereas serviceprovidersconductfieldoperations,includinghydraulicfracturingoperations.31_Service providersinturnoftensubcontractpartsoftheiroperationstoavarietyofspecialists,notably companiesthatminethesandusedinhydraulicfracturing.32,33_{Investorsandlendersshould} beawareofthewaterrisksfacingallofthecompaniesengagedinthehydraulicfracturing valuechain,butthisreportfocusesonoperatorsandtheirfirst-tierserviceproviders. Thetop10operatorsmeasuredbynumberofwellsdeveloped(Figure 16)accountedfor 56percentofthewaterusedforhydraulicfracturingacrosstheU.S.andhaverelatively highexposuretowaterstress.Chesapeakewasthebiggestuserofwater,usingnearly 12billiongallonsfromJanuary2011toMay2013,mostlyinmediumwaterstressregions. EOGusedover8billiongallons,whileseveralothersreportedusebetween5-6billiongallons, Number of W ells

FIGURE 16:TOP TEN OPERATORS BY NUMBER OF WELLS & EXPOSURE TO WATER STRESS

Percent of Wells in Medium or Higher Water Stress Regions

Figure 16:Areas of circles represent volumes of water used for hydraulic fracturing, with Chesapeake using approximately 12 billion gallons, Anadarko at 6 million gallons and Oxy at approximately 600,000 gallons.

(31)

includingXTO,Anadarko,Devon,EncanaandSouthwestern,withthelatterhavingthelowest exposuretowater-stressedregions(watervolumesreporteddonotdistinguishbetweenfresh, brackish,recycledandwastewatersources).

Operatorsvaryintheirexposuretowaterstressandintheamountofwatertheyuseineach region(Figure 18 andAppendix B).Anadarkousedarelativelylargeamountofwaterand hasexposuretomediumorhigherwaterstressregionsacrossfivedifferentplayswhereithas significantoperations.Mostofthemajoroperatorshadsignificantexposuretowaterstress, especiallyinthelargerwater-usebasinsandplays.Pocketsofhighoperatorwaterstress exposurealsoexistintheFayetteville,Piceance,GraniteWashandDJBasin. Serviceprovidersarealsoexposedtovaryingdegreesofwaterstress.Thesecompaniesplay acrucialroleinorchestratingtheentiresupplychain,includingactingastechnicaladvisors onkeyoperationalstrategies.Thestructureofthissectorisfarmoreconcentratedwiththe topthreeserviceproviders—Halliburton,SchlumbergerandBakerHughes—collectively accountingfor55percentofallhydraulicfracturingwellsreportedandjustunderhalfofthe waterusedforhydraulicfracturingnationally. Halliburtonalonehandlednearly25billiongallonsofwaterforhydraulicfracturingoperations, nearlyaquarterofallthewaterusednationally,followedbySchlumberger,BakerHughesand FTS(Figure 17).Allofthetop10serviceproviders(bynumberofwellsdeveloped)hadthe majorityoftheiroperationsinmediumorhigherwaterstressregions. For15percentofthewelldata,itwasnotpossibletoidentifywhichserviceprovider hydraulicallyfracturedthewells.Serviceprovidersareunfortunatelynotcurrentlyrequiredto reporttoFracFocus.(Formoredetailsofserviceproviderdataanalysisandexposuretowater stressbyplay/basin,seeAppendix A and C).

|

FIGURE 17:TOP TEN SERVICE PROVIDERS BY NUMBER OF WELLS & EXPOSURE TO WATER STRESS

Number of W

ells

Percent of Wells in Medium or Higher Water Stress Regions

Figure 17:Area of circles represents total water use by service provider. Approximately 15 percent of the wells did not have sufficient information to identify the service provider since service providers are not required to report to FracFocus.

SourceCeresanalysisusingWRIAqueduct WaterRiskAtlasincombinationwithwelldata fromPacWestFracDBfromFracFocus.org betweenJanuary2011-May2013.

(32)

|

FIGURE 18:OPERATORS BY WATER USE & EXPOSURE TO WATER STRESS

Gallons of Water (Billions)

Arid & Low Water Use Figure 18:Operators ranked by

water volume used for hydraulic fracturing and water stress category. Companies reporting less than 500 million gallons of water were excluded. Sources and type of water not reported.

(33)

34 RichardLiroff,InvestorEnvironmentalHealthNetworkandInterfaithCenteronCorporateResponsibility,“ExtractingtheFacts:AnInvestorGuideto DisclosingRisksfromHydraulicFracturingOperations,”December2011. 35 RichardLiroff,DanielleFugere,LuciavonReusner,StevenHeimandLeslieSamuelrich,“DisclosingtheFacts:TransparencyandRiskinHydraulic FracturingOperations,”November2013. 36 CDP,“MovingBeyondBusinessasUsual,ANeedforaStepChangeinWaterRiskManagement,”CDPGlobalWaterReport2013. 37 CeresanalysisofSECCommentLettersissuedbetweenJanuary1,2010toNovember30,2012. 38 JPMorganandBankofAmericahavedescribedimprovingduediligencepracticesconsideringrisksinhydraulicfracturingintheir2012corporate responsibilityreports.

39 “RabobankTurnsAgainstShaleGas,”PressEurop ,July1,2013,http://www.presseurop.eu/en/content/news-brief/3928871-rabobank-turns-against-shale-gas.

Growing Investor Focus

Theinvestmentandfinancialcommunityisincreasinglydoingmoretobetterunderstandand addresswaterandotherenvironmentalrisksassociatedwithhydraulicfracturing.Nearly40 shareholderresolutionshavebeenfiledwithcompaniesonhydraulicfracturing-relatedwater risksinthepastfewyears.Investorshavealsobeenengagingcompaniesontheenvironmental andsocialrisksaroundhydraulicfracturing.Acoalitionofinvestorsrecentlypublishedaset ofexpectationsforcompaniesaroundtransparencyandbestpractices,aswellasafollow-up publicationshowingthatcompaniesarefailingtomeetinvestorexpectationsoneventhebasic parametersofbetterdisclosure.34,35_{Also,over593(of1,000asked)globalcorporations} responded tothemostrecentCDPsurveyonwaterrisk,whichwasbackedby530institutional investorsmanagingapproximately$57trillioninassets.Ofthesectorsrepresentedbythe surveyedcompanies,theenergysectorpersistentlyremainsatthebottomofthelistinterms ofaresponserateatonly47percent.36_{Securitiesregulatorsarealsolookingatthesector:} theU.S.SecuritiesandExchangeCommissionhassentover70letterstocompaniesasking forfurtherinformation onpotentialrisksfromhydraulicfracturing.37 Financialinstitutionswithlendingandinvestmentbankingrelationshipswithcompaniesengaged inhydraulicfracturingareapproachingtherisksindifferentways,withsomedevelopingmore robustriskassessmentframeworks38_{andothersavoidinglendingtoorinvestmentinhydraulic} fracturingoperationsaltogether.39 Investorsandlendersmustprioritizetheiranalysisofandengagementwithcompanies.Given thefactorsthatshapeshaleoilandgascompanyexposuretowatersourcingrisks,priority shouldbegiventooperatorsandserviceproviderswiththemostsignificantexposurein regionsofhighestwaterstress,groundwaterdepletionanddroughtconditions.Ultimately,the companiesthataretakingtheleadinaddressingtherisingcostsofaccessingwaterandthe potentiallossofthesociallicensetooperatewilldifferentiatethemselvesfromothersinterms ofshareholdervalue. |

Given the factors that shape shale oil and gas company exposure to water sourcing risks, priority should be given to operators and service providers with the most significant exposure in regions of highest water stress, groundwater depletion and drought conditions.

(34)

Source:NathanRichardson,MadelineGottlieb,AlanKrupnickandHannahWiseman,ResourcesfortheFuture,The State of State Shale Gas Regulation,June2013.

40 KiahCollier,“OilIndustryFocusesonWater-Use,”San Angelo Standard Times,December2,2011, http://www.gosanangelo.com/news/2011/dec/02/oil-industry-mulls-need-to-get-water-consumption/?print=1.

Water Sourcing

Regulatory Landscape

Rapidlygrowingdemandforwaterforhydraulicfracturinghaschallengedwaterresource managersinmanyregions.Manystateandregionalwaterplanshavequicklybecomeoutdated asdemandforwaterforshaleoilandgasdevelopmentincreasesandexpandsintonewregions.40 Statesorprovinceshavetheprimaryresponsibilityforpermittingoilandgasdevelopment andrelatedwatersourcing,butthereiscurrentlysignificantdisparityintheirapproaches toregulatingshalewaterrequirementsandassociatedimpacts. ArecentstudybyResourcesfortheFuturelookedatregulationsrelevanttoshaleenergy developmentandfoundmarkedlydifferentwaterwithdrawalpoliciesacross30statessurveyed, includingthosewithmajorshaleenergydevelopment(Figure 19,stateswithmajorshale energydevelopmentareoutlinedinyellow).Thestudyfoundthatformostofthe26states withanywaterwithdrawalpermittingrequirements,onlyhalfrequirepermitsforallwithdrawals. Severalstatesdonotrequirepermitsatall,butonlydisclosureofwateruseoveracertain threshold,asrepresentedbythelightpurplestates. Inaddition,somestatesandprovincesexempttheoilandgasindustryfrompermitting requirementsforwaterwithdrawals,including: • Kentucky,whichexemptstheindustryfrombothsurfaceandgroundwaterreporting. • Texas,whichrequirespermitsforsurfacewaterwithdrawals,butgenerallynotforgroundwater. • British Columbia,wherenoreportingorpermittingrequirementsexistforgroundwater

withdrawalsbyanyindustrialusers.TheBritishColumbiaWaterActiscurrentlybeing reviewedtocorrectthis.

|

States or provinces have the primary responsibility for permitting oil and gas development and related water sourcing, but there is currently significant disparity in their approaches to regulating shale water requirements and associated impacts.

FIGURE 19:WATER WITHDRAWAL REGULATIONS BY STATE

Permit required over threshold shown (1,000 gal/day) (21 states) Registration & reporting required over threshold shown (1,000 gal/day) (4 states) Permit, registration & reporting required over threshold shown (1,000 gal/day) (5 states) No evidence of regulation found (1 state) Not in study

Top 5 states by number of natural gas wells (2011) States with no natural gas wells (2011)

Hydraulic Fracturing & Water Stress: Water Demand by the Numbers